Valeant exec and Philidor chief charged with multi-million dollar fraud

US federal prosecutors have arrested and charged Gary Tanner, a former executive at Valeant Pharmaceuticals, and Andrew Davenport, the ex-CEO of Philidor, charging them with concocting a multimillion-dollar fraud and kickback scheme.

After the first signs of foul play last year, federal investigators have been probing whether Valeant defrauded insurers by concealing its links with mail-order pharmacy Philidor since August.

Now the federal team has charged Tanner and Davenport, uncovering swathes of evidence, including shell companies allegedly set up by the two men to siphon off funds from transactions made between the two companies.

US Attorney Preet Bharara says Tanner and Davenport set up a fraudulent scheme to illegally use Philidor “as a vehicle for personal profit and self-dealing.”

“Their alleged kickback scheme illegally converted Valeant shareholder money into their own personal nest eggs.  As alleged, while purporting to be arms-length business counterparts, the two men were, in fact, partners in crime,” Bharara added.

For Valeant, the news is in fact not as bad as feared, as neither its chief executive nor its chief financial officer at the time have been implicated in the fraud.

Philidor was a specialist mail-order pharmacy established in early 2013 with the assistance of Valeant, including assistance with financing, personnel, and supervision.  The Department of Justice says that during the course of Philidor’s existence, at least 90% of the drugs dispensed by Philidor were Valeant-branded drugs.

It says Gary Tanner was the Valeant executive primarily responsible for the Philidor relationship, as well as Valeant’s alternative fulfillment (“AF”) programme.  This AF programme attempted to encourage doctors to prescribe, and patients to purchase, Valeant Pharmaceuticals instead of generics or other alternatives by helping them obtain insurance coverage, or providing other incentives for prescription and purchase of its drugs.

Then in the autumn of 2014, Tanner and Davenport organised Valeant’s agreement to purchase an option to buy Philidor for almost $300 million.

The associates are then said to have set up shell companies and shell company bank accounts to launder and distribute multimillion dollar kickbacks, taken from this purchase option – all the while maintaining the pretence of working independently in the interests of their respective companies.

The Department of Justice has also tracked what the alleged accomplices spent their ill-gotten gains on: Tanner used the kickback funds to purchase a new home and to pay for personal expenses. Meanwhile, Davenport spent tens of millions of dollars on securities and luxury purchases, including the installation of a $50,000 custom wine cellar.

Valeant was eventually forced to sever all ties with Philidor, which then closed down. Valeant’s CEO and CFO at the time, J. Michael Pearson and Howard Schiller, also left the company in the wake of the scandal, and both could still face charges for misconduct.

Even without the Philidor scandal, Valeant is beset with overwhelming problems, including a Congressional investigation into its strategy of huge price rises on its drugs.

The company has also accumulated a huge debt burden built up by a whirlwind of M&A conducted by Pearson in his pursuit of outstanding growth. Valeant is now looking to offload some of these acquisitions to stabilise its business – specialist gastrointestinal pharma business Salix could be sold to Takeda for around $10 billion.

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